BC keeps Selic at 13.75% and interrupts cycle of high interest rates

The Central Bank’s Copom (Monetary Policy Committee) decided to keep the basic interest rate (Selic) at 13.75% this Wednesday (21), interrupting its longest cycle of monetary tightening.

The BC collegiate also indicated that future monetary policy steps could be adjusted and that “it will not hesitate to resume the adjustment cycle if the disinflation process does not proceed as expected”.

“The committee will remain vigilant, assessing whether the strategy of maintaining the basic interest rate for a sufficiently long period will be able to ensure the convergence of inflation,” he said.

The Selic, which started from its historic low –2% per year–, reaches the end of the cycle at the highest level in almost six years. From October to November 2016, during the government of Michel Temer (MDB), the interest rate was fixed at 14% per year.

In all, there were 12 consecutive increases between March 2021 and August this year, with an accumulated increase of 11.75 percentage points.

The current interest rate shock is also the strongest since the adoption of the inflation targeting regime in 1999. At the time, the basic rate jumped from 25% to 45% per year.

With this Wednesday’s decision, Brazil occupies the position of the country with the highest real interest rate per year, discounting the inflation projection for the next 12 months, according to the ranking prepared by the portal MoneYou and the manager Infinity Asset Management. The list has 40 countries.

Until February of this year, Brazil was at the top of the ranking, but was overtaken by Russia in March, after the sharp rise in interest rates in the country amid the Ukrainian War. In May, when the Russian central bank cut the rate from 20% to 14% a year, Brazil returned to the top of the list.

The Copom’s decision was in line with the majority expectations of the financial market. A survey carried out by Bloomberg showed that most analysts expected the Selic to be maintained at 13.75%, while a smaller portion projected a residual adjustment of 0.25 percentage point.

Since the previous meeting of the collegiate, in August, inflation projections have cooled down for both this year and next. In the period, there was also a drop in the price of a barrel of oil on the international market.

In the Copom reference scenario, inflation projections fell from 6.8% to 5.8% this year and remained at 4.6% for 2023. For 2024, the collegiate raised the forecast from 2.7% to 2 .8% (still below the target center of 3%). In its panorama, it adopted the hypothesis of a green tariff flag in December of this year.

“The committee judges that the uncertainty surrounding its assumptions and projections is currently greater than usual,” he said.

In the balance of risks, the BC sees risk factors for inflation. Among the conditions that would push prices up, the Copom highlighted the persistence of global inflationary pressures and the uncertainty about the country’s fiscal situation.

In the opposite direction, it indicated the further fall in international commodity prices, a sharper-than-projected slowdown in global economic activity and the maintenance of tax cuts projected to be reversed in 2023.

According to the latest BC Focus bulletin, released on Monday (19), the market estimate for the 2022 IPCA (Broad Consumer Price Index) dropped for the 12th consecutive week, from 6.4% to 6 %, and the forecast for 2023 dropped from 5.17% to 5.01% – the fifth consecutive drop.

The lower inflation forecast this year incorporates the impact of tax cuts. The country registered two months of deflation (falling prices), in July and August, driven by the reduction of ICMS rates on fuel and electricity.

In the 12-month period up to August, the IPCA stood at 8.73%, according to data from the IBGE (Brazilian Institute of Geography and Statistics).

Despite the downward revisions, the projections remain far from the goals pursued by the BC for 2022 and 2023 – set by the CMN (National Monetary Council) at 3.5% and 3.25%, respectively, with a tolerance of 1.5 percentage points for more or less.

This year’s objective has already been abandoned by the monetary authority, which said in the last quarterly inflation report, in June, that it sees 100% of risk of exceeding the target in 2022. Given the lag of the effects of high interest rates on the economy, the collegiate takes its decision seeking the convergence of inflation “towards the target” next year and, to a lesser extent, in 2024.

Despite the relief on short-term indicators, the perception of economic activity and fiscal uncertainties for 2023 have put pressure on expectations.

In recent weeks, market estimates for 2024 inflation began to deteriorate and advanced to 3.5%, compared to 3.3% at the previous Copom meeting, early moving away from the center of the target (3%).

The Copom meets again on October 25th and 26th, on the eve of a possible second round of elections, to calibrate the Selic level.